Palestinians accused the Israeli prime minister of seeking to return to power "on a wave of blood" in tomorrow's election. In Cairo, the Arab League condemned a "serious escalation carried out by the Israeli government to serve its election goals".

Fifty tanks supported by helicopter gunships moved down the main street in Gaza City, ramming three buses, and destroying about 50 metal workshops and three houses belonging to the families of Palestinians responsible for attacks on Israeli targets. Dozens of market stalls were damaged by fire.

After 10pm on Saturday, tanks rumbled in from three directions as militants rushed on to the street to engage in one-sided gun battles. There were no Israeli casualties when the army pulled out at dawn.

The Defence Ministry said the Gaza raid came in response to the firing of 10 home-made Qassam missiles that landed near Israeli towns without causing damage or casualties over the weekend. In an act of defiance, Hamas, the Islamic resistance movement, fired four more rockets after the tanks had departed yesterday, also without causing damage.

The Israeli army later shot dead an eight-year-old Palestinian boy and injured his brother as they played outside their home in the southern Gaza Strip, Palestinian officials said.

As part of the preparations for tomorrow's Israeli election, the army blockaded the West Bank and Gaza Strip, barring all Palestinians from travelling into Israel and confining most of them to their towns and villages.

During the Gaza raid the army said it had destroyed about 100 lathes that could be used to make tubes for crude missiles. This is not the first time that the Israeli army has gone after suspect metal workshops, but it appeared to be an attempt to destroy every lathe in the Gaza Strip.

In one industrial zone, Mahmoud Bakhtiti, 50, a workshop owner, insisted that he had never been asked to make missile tubes, and worked only on refurbishing car engines.

The raid penetrated further into the heart of the alleys of Gaza City than ever before, taking the Palestinian fighters by surprise. Three were killed by a helicopter-fired missile as they stood against a wall near the Mosque of the Candle.

"There were eight of us. We heard that there was a raid and we went out to decide what to do. Suddenly there was a rocket and three of us were dead," said Mohammed Khalifeh, a cousin of one of the dead men.

Eleven of the 12 men killed in the raid were apparently armed. One man, speaking from his bed in the Shifa hospital in Gaza, said: "I was about to go to sleep when I heard there was a raid. I went to the Hamas office where they know me. They gave me a Kalashnikov rifle. I saw the tanks all lined up on the street, then I was hit in both arms."

An Israeli officer quoted on Israel Radio said: "It started with sporadic opposition, but when they realised that we were entering in a big way, they started organising, and we saw in the course of the night they started to organise themselves in a much more orderly way."

Tayeb Abdel-Rahim, an aide to Yasser Arafat, the Palestinian leader, said during a hospital visit: "The Israelis are taking advantage of the fact that the world's attention is focused on Iraq. Sharon wants to return to power on a wave of Palestinian blood, and we are paying the price."

Opinion polls showed Mr Sharon's Likud party emerging as the biggest in the 120-seat Knesset. It is expected to win 31 seats, with the dovish Labour party slumping to a mere 19.

But Mr Sharon's less than convincing victory will leave a bitter taste, as he is likely to be forced into a coalition with far-Right and religious parties who - by his own admission - will want to "blackmail" him for their own interests. Commentators predict a stormy ride for Mr Sharon, and new elections in less than two years.